EUR/USD struck a new trend low as the dollar rallied broadly today, but its slide may soon stall, especially if this week's U.S. CPI report comes in soft.
U.S. Treasury yields and Fed rhetoric have driven dollar strength, but neither factor has changed recently, suggesting that EUR/USD's losses are the result of traders unwinding long euro positions.
The near 4.5 percent slide from April's high indicates that net-long EUR positions are likely to have already been unwound significantly and could soon be approaching a neutral level. Indeed, net-EUR/USD positions for retail accounts are already very close to neutral. If institutional traders are close to neutral, then the fuel for downside momentum is running low.
In this context, U.S. CPI will be pivotal.
A downside surprise would push UST yields lower, and the dollar will follow suit. With a smaller base of sellers after the recent reduction in long position, EUR/USD could rally, possibly testing the 10 and 200-DSMAs and May 2 high.
A break of those resistances could open the door to the 1.2230/50 zone.